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A simple isochore model evidencing regulation risk

Published online by Cambridge University Press:  27 February 2018

J. Lévy Véhel Open the ORCID record for J. Lévy Véhel [Opens in a new window]
J. Lévy Véhel*
Affiliation:
Anja team, INRIA Rennes, Université de Nantes, Laboratoire de mathé matiques Jean Leray, 2, Rue de la Houssiniere, 44000 Nantes, France
*
*Correspondence to: J. Lévy Véhel, Anja team, INRIA Rennes, Université de Nantes, Laboratoire de mathé matiques Jean Leray, 2, Rue de la Houssiniere, 44000 Nantes, France. E-mail: [email protected]
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Abstract

In this note, we provide a simple example of regulation risk. The idea is that, in certain situations, the very prudential rules (or, rather, some of them) imposed by the regulator in the framework of the Basel II/III Accords or Solvency II directive are themselves the source of a systemic risk. The instance of regulation risk that we bring to light in this work can be summarised as follows: wrongly assuming that prices evolve in a continuous fashion when they may in fact display large negative jumps, and trying to minimise Value at Risk (VaR) under a constraint of minimal volume of activity leads in effect to behaviours that will maximise VaR. Although much stylised, our analysis highlights some pitfalls of model-based regulation.

Keywords

Regulation and systemic riskValue at riskHeavy-tailed processes
Type
Paper
Information
Annals of Actuarial Science , Volume 12 , Issue 2 , September 2018 , pp. 233 - 248
Copyright
© Institute and Faculty of Actuaries 2018 

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